You can 1031 exchange a Sacramento rental for investment property in any other state, because federal law treats real property anywhere in the United States as like-kind. California defers its tax too, but it keeps the gain's California source: you file FTB Form 3840 for the year of the exchange and every year after, and when you sell the replacement in a taxable sale, California taxes that deferred gain even if you've moved away. In the Elk Grove example below, about $290,000 of gain stays on California's books until then.
You own a rental in the Sacramento area, you want to keep investing in real estate but not in California, and you want to know what the state does with your tax if you exchange out.
1031 exchange out of California at a glance
| Can the replacement be in another state? | Yes, any U.S. real property held for investment or business |
|---|---|
| Foreign property | Not like-kind with U.S. property |
| California filing | FTB Form 3840 every year until the deferred California gain is recognized |
| Who files | Every exchanger, resident or not; standalone if you have no other California return |
| Due with a 2025 return | April 15, 2026 (October 15, 2026 on extension) for calendar-year individuals |
| Form 593 at the sale | Exempt for a valid exchange; 3 1/3% on boot over $1,500; 3 1/3% of the price if it fails |
| When California collects | When the replacement is sold in a taxable sale, or boot is received |
How a 1031 exchange from California to another state works
The federal mechanics are the same wherever the replacement sits: a qualified intermediary holds the money, you identify within 45 days and close within 180. Those rules are in the California 1031 exchange guide. What changes when you cross the state line is who gets to tax the gain later.
Like-kind real property across state lines
A Sacramento house can become a duplex in another state, land or a commercial building, as long as you hold it for investment or business. IRS Publication 544 (2025) draws one geographic line: real property in the United States and real property outside it aren't like-kind, so a foreign replacement makes the whole gain taxable.
California keeps the 1031 gain's source
The FTB's 2025 Form 3840 instructions say the source of a gain on California property is fixed when the gain is realized and preserved no matter when it's recognized. In plain terms, the gain your Sacramento rental earned stays California income. Moving the money to another state, or moving yourself, doesn't change where that gain came from.
FTB Form 3840: California's yearly 1031 filing
California has required this information return for exchanges of California property for out-of-state property since tax years beginning January 1, 2014. It's the paperwork behind what people call the clawback.
Who files FTB Form 3840 after a 1031 exchange
Every taxpayer who exchanges California real property for property outside California files it, regardless of where they live, including individuals, trusts, partnerships, LLCs and corporations. If an LLC is disregarded for tax, its owner files. If you have no other California return to file, you complete and sign the whole form and mail it on its own to the FTB.
When FTB Form 3840 is due
You file it for the year of the exchange and for each year after, generally until the California-source deferred gain is recognized on a California return. It goes with your California return, so for an individual on a calendar year, the 2025 form was due April 15, 2026, or October 15, 2026 with an extension.
What FTB Form 3840 reports
The form carries the property descriptions, dates and gain figures from federal Form 8824, then lists each property given up and received. It asks for the California adjusted basis, which can differ from the federal figure because of past depreciation differences, and for the California-source deferred gain allocated to each replacement. The first year is marked Initial, the years in between Annual, and the last one Final, with a statement explaining how the gain was recognized.
Missing an FTB Form 3840 filing
If you skip the form and don't file a California return, the FTB may issue a Notice of Proposed Assessment that adds the California-source deferred gain to your income, with tax, penalties and interest. The deferral survives on paper only while you keep filing.
The California clawback: what makes the 1031 gain taxable later
The FTB instructions describe the deal: the exchange defers tax, and you recognize the gain when the replacement is sold or disposed of in a later taxable transaction. California waits for that day.
Selling the out-of-state 1031 replacement
Sell the replacement for cash and the deferred gain comes due federally and in California. California taxes the California-source part, the amount on your Form 3840, as ordinary income, and you file a nonresident return if you've left the state. The new state taxes the gain under its own rules, and how the two states credit each other depends on where you live then, so ask a CPA licensed in both.
A second 1031 exchange keeps the California gain deferred
If you exchange the replacement again instead of selling it, nothing is recognized, so the deferral continues and so does the Form 3840 filing. When one exchange brings in several properties, the form makes you allocate the California-source gain across all of them, wherever they are.
Boot in a later 1031 exchange
Cash you keep or debt you don't replace in a later exchange is taxable, and some of that taxable gain can be the California-source gain from your original Sacramento rental. Your CPA tracks how much of the California amount is left after each event.
Holding the 1031 replacement until death
Under IRS Publication 551, heirs generally take a basis equal to the property's value at death, which erases the built-up gain for them. Many owners who exchange out of state plan to hold for life for this reason. Ask your CPA and estate attorney how that interacts with the final Form 3840 before you count on it.
1031 exchange out of California: an Elk Grove example
Labelled assumptions, not advice. You sell an Elk Grove rental for $625,000, close to Zillow's September 2026 typical value there of $624,643. Selling costs are $35,000 and your California adjusted basis is $300,000, so the gain is $290,000. You buy a $700,000 rental in another state through a qualified intermediary and take no cash.
| What happens | Federal | California |
|---|---|---|
| Year of the exchange | $290,000 deferred on Form 8824 | $290,000 deferred; Form 3840 marked Initial |
| Each year you hold the replacement | Nothing filed about the old gain | Form 3840 marked Annual, every year |
| You sell the replacement for cash | The deferred gain plus any new gain is taxed | The $290,000 is taxed as ordinary income; Form 3840 marked Final |
| You exchange again | Still deferred | Still deferred; keep filing |
The site's capital gains guide found most of a single-house gain lands in the 9.3% band of the FTB's 2025 schedules; at that rate, $290,000 is roughly $27,000 of state tax waiting for you. Rates in the year you finally sell may differ. Any gain the new property earns after the exchange is sourced where it sits.
Form 593 withholding on a 1031 exchange out of California
Escrow on the Sacramento sale still has to deal with California's real estate withholding. The 2026 Form 593 instructions treat an exchange differently at each step.
No Form 593 withholding at the initial 1031 transfer
A sale that's part of a deferred exchange is exempt from withholding when it closes. You sign the perjury statement on the form; the buyer doesn't need to sign.
Boot over $1,500 in a 1031 exchange
If you receive more than $1,500 in cash or other property, the qualified intermediary withholds. Under the standard method it's 3 1/3% of the boot, so $20,000 taken out costs $666 in withholding, which you claim back as a credit on your California return.
A failed 1031 exchange
If no replacement closes, or the exchange doesn't qualify, the intermediary withholds 3 1/3% of the sale price: about $20,813 in the Elk Grove example. When that happens in the year after the sale, the instructions let the credit follow the year the money was withheld, because the gain can be reported like an installment sale.
Choosing a state for a 1031 replacement property
The tax on the old gain is fixed by California. What the new state decides is everything after: the tax on rent and future appreciation, the holding cost and how hard the property is to own from here. Compare three things before you pick.
State income tax on the new 1031 rental
The rent the replacement earns, and any gain on top of the $290,000, is generally taxed where the property sits. If you stay a California resident, the FTB taxes you on all income regardless of source, so a low-tax state saves less than it looks until you move. Ask your CPA how the credit for taxes paid to another state works for you.
Property tax on the 1031 replacement
The new property starts with a new assessment under that state's rules. If your Sacramento rental carried a Prop 13 value from years ago, compare its bill, explained in the Sacramento County property tax guide, with the replacement's full bill before you decide the move pays.
Managing a 1031 rental from Sacramento
An exchange keeps you a landlord, now at a distance. Price a local manager into the return, read the landlord rules in the new state and visit before you identify. If the reason you're selling is being done with tenants, a long-distance rental moves that problem further away.
DST 1031 exchange from California
In Rev. Rul. 2004-86, the IRS held that you can exchange real property for an interest in a Delaware statutory trust structured as that ruling describes without recognizing gain. Many DST properties are outside California, so a DST purchase is often an exchange out of the state.
FTB Form 3840 on a DST 1031 exchange
The Form 3840 instructions cover this case: you enter the trust's name where the property address would go. The annual filing applies the same way as for a house in another state, and the trust's later sale of its property is the taxable event that ends the deferral unless you exchange again.
What a DST 1031 exchange trades away
You buy a fractional interest sized to your exchange money, which can make the 45-day identification easier. In return you give up control over the property, its loan and the timing of its sale, and the interest is hard to sell early. A DST is a securities investment, so compare the offering's fees and risks with a financial adviser who isn't paid on the sale. Justin doesn't recommend DST sponsors or intermediaries.
1031 rules owners ask about: the 2-year rule, the 95% rule and the lazy exchange
The 2-year rule for a related-party 1031 exchange
If you exchange with a related person, such as a spouse, child, parent, sibling or a company you control, and either of you disposes of the property within two years of the last transfer, the deferral is lost and the gain is taxed in the year of that disposal. IRS Publication 544 excludes dispositions caused by death, involuntary conversions and cases where the IRS accepts that tax avoidance wasn't a main purpose. The two years don't run while a put, a short sale or someone else's right to buy reduces your risk of loss.
The 95% rule in a 1031 exchange
You can normally identify three properties of any value, or any number whose total value is no more than double what you sold. If you identify more than that, Publication 544 treats only two groups as identified: property you received within the 45 days, and identified property you receive within the exchange period, but only if it's worth at least 95% of everything you identified. In practice, the 95% rule rescues an over-long list only when you buy almost all of it.
The lazy 1031 exchange, explained neutrally
"Lazy 1031" is an informal name, not an IRS term. It describes selling a rental in a normal taxable sale and buying another one in the same year, then using a cost segregation study and bonus depreciation on the new property to create a paper loss that offsets some of the gain. No intermediary or 45-day deadline is involved. The catches: whether the loss can offset the gain depends on the passive activity rules and your situation, depreciation you claim now raises the gain when you sell later, and California hasn't conformed to federal bonus depreciation under IRC 168(k), per the FTB's 2025 Form 3885A instructions, so the state tax on the sale is offset far less. Run it with a CPA before you rely on it.
What can be better than a 1031 exchange
For an owner who wants to be done, often a plain sale: you pay the tax once, keep the cash and stop filing Form 3840. An installment sale spreads the gain over the years you're paid, a house that used to be your home may qualify for the section 121 exclusion, and holding until death can wipe out the gain for heirs. The capital gains tax on a California rental guide prices each option, and moving into a replacement yourself has its own rules in converting a 1031 rental to your primary residence.
When a 1031 exchange out of California fits a Sacramento owner
Pick the out-of-state exchange if you want to keep owning rentals for many years, ideally for life, and you're ready to manage one from a distance. Skip it if you're selling to be done with tenants: you'd defer a California tax you'll probably still pay, carry a yearly filing, and still be a landlord. For that owner, the tired landlord route of selling and paying the tax is the cleaner exit.
Either way, the exchange has to be in place before your sale closes. This is general information, not tax or legal advice; talk to a CPA and a real estate attorney before you sign an exchange agreement, and see the site's guide to selling a rental in Sacramento for the sale itself.
1031 exchange out of California questions
Can I do a 1031 exchange from California to another state?
Yes. Any U.S. real property held for investment or business is like-kind to a California rental. The catch is that California keeps the gain's California source. You file FTB Form 3840 with your California return for the year of the exchange and every year after, and California taxes that deferred gain when you sell the replacement, even if you've moved away by then.
What is the 2-year rule for a 1031 exchange?
It's the related-party rule in section 1031(f). If you exchange with a relative or a company you control and either side disposes of its property within two years, the deferred gain becomes taxable in that year. Death, involuntary conversions and dispositions the IRS accepts weren't mainly for tax avoidance are excepted. Section 1031 sets no general holding period.
What is a lazy 1031 exchange?
It's a nickname, not an IRS term, for selling a rental in a regular taxable sale and buying another in the same year, then using cost segregation and bonus depreciation to create a loss that offsets part of the gain. There's no intermediary or deadline. Whether it works depends on the passive loss rules, and California doesn't allow federal bonus depreciation.
What is the 95% rule in a 1031 exchange?
It's an exception to the identification limits. Normally you may identify three properties, or any number worth no more than double what you sold. If you identify more, the exchange still holds only for property received within 45 days, or if what you buy is worth at least 95% of the total value of everything you identified.
What is better than a 1031 exchange?
It depends on your goal. If you want to stop being a landlord, a plain sale ends the tax question and the Form 3840 filings. An installment sale spreads the gain, the section 121 exclusion helps on a former home, and holding until death gives heirs a stepped-up basis. A DST keeps the deferral without management, at the cost of control.
Do I still owe California tax if I move out of state after a 1031 exchange?
Yes, on the gain from the California property. The FTB treats that gain's source as fixed when it was realized, so when you sell the replacement in a taxable sale, California taxes the deferred California amount on a nonresident return. Until then you keep filing Form 3840 each year, on its own if you have no other California return.
Is a 1031 exchange out of California exempt from Form 593 withholding?
At the sale, yes, if it's part of a valid deferred exchange. The qualified intermediary withholds 3 1/3% of any boot over $1,500 you receive, and 3 1/3% of the full sale price if the exchange fails. Any amount withheld is a credit on your California return for the year it was withheld.
Sources
- FTB: 2025 Instructions for Form FTB 3840, California like-kind exchanges
- FTB: 2026 Instructions for Form 593, real estate withholding (exchanges, boot, failed exchanges)
- FTB: 2025 Instructions for Form FTB 3885A (IRC 168(k) nonconformity)
- FTB: Capital gains and losses
- IRS Publication 544 (2025): Sales and other dispositions of assets (identification, related persons, foreign real property)
- IRS Publication 551 (12/2025): Basis of assets (inherited property)
- IRS Rev. Rul. 2004-86, Internal Revenue Bulletin 2004-33 (Delaware statutory trusts)
- FTB: Residents (taxed on all income regardless of source)
Reviewed by Justin Vierra
Justin reviewed this page for accuracy on October 28, 2026. Figures come from the sources listed above. Our research process.
Justin Vierra is a Sacramento Realtor® with GUIDE Real Estate and Principal of the Vierra Group who sells rental homes for their owners, with tenants in place or vacant. He spent six years in Midtown property management before he began selling homes in 2010.
- Since 2010Licensed in California, DRE #01880488
- 6 yearsManaging Midtown rental property before he sold homes
- 447Vierra Group team sales on Zillow, 26 in the past 12 months
- 440+Career sales, as reported by Justin
- Six years in property management: Midtown Sacramento: older buildings, multifamily property, maintenance and tenants
- Principal, Vierra Group: His team at GUIDE Real Estate, 3001 I Street, Sacramento
- Sacramento Real Producers: Top 250 agent for 2025, as reported by Justin
Realtor®, DRE #01880488. Vierra Group, GUIDE Real Estate, 3001 I St, Suite 200, Sacramento, CA 95816. General information, not legal, tax or financial advice.
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